RAM Ratings Lanka assigns initial ratings of BB+/NP with a stable outlook to Vallibel Finance

RAM Ratings Lanka has assigned respective long- and short-term initial financial institution ratings of BB+ and NP to Vallibel Finance PLC.

The long-term rating carries a stable outlook. Vallibel’s ratings are moderated by the increasing trend in new non-performing loans in recent times, coupled with its unseasoned loan portfolio, given aggressive loan growth. The ratings are, however, upheld by the Company’s average asset quality, performance and capitalisation levels.

Vallibel was incorporated in 1974 as a small family-owned finance company under the name of The Rupee Finance Company. In 2005, it was acquired by Vallibel Investments Ltd. and renamed Vallibel Finance Company.

Following the change in ownership, the company has aggressively increased its credit assets, which made up 1.83% of industry assets as at end-March 2012, from 0.63% as at end-March 2008.

Vallibel, whose principal lending activities include leasing and hire-purchase facilities, operates with six branches and four collection centres. In May 2010, the company listed its shares on the main board of the Colombo Stock Exchange (CSE), although Vallibel Investments Ltd. remains its largest shareholder with a 72.87% stake as at end-September 2012. Vallibel’s asset quality is viewed as average.

While the company’s loan assets have expanded aggressively at a compound annual growth rate of 68.16% over the past five years, it has seen a significant increase in new NPLs in recent times; its gross NPL ratio, however, is in line with that of similarly-rated peers.

The company’s gross NPL ratio improved from 4.26% as at end-FYE 31 March 2010 to 1.81% as at end-FY Mar 2012, supported by robust loan growth and strong recoveries; the ratio deteriorated to 2.67% as at end-1H FY Mar 2013 with an increase in NPLs. Further, Vallibel’s loan portfolio lacks seasoning, which could result in future delinquencies, given the moderating macro-economic environment.

Overall, Vallibel’s performance is deemed average; its profitability indicators were relatively stable and in line with similar-rated peers’. The company’s net interest margin clocked in at 10.85% in FY Mar 2012 (FY Mar 2011: 11.46%), although narrowing to 9.26% in 1H FY Mar 2013 as deposits re-priced upward faster in a rising interest-rate environment.

Meanwhile, Vallibel’s cost to income ratio compared better to peers’ at 44.29% in FY Mar 2012 (FY Mar 2011: 47.24%), despite branch expansion. Going forward, RAM Ratings Lanka opines that performance levels may be somewhat subdued compared with previous years, owing to the moderating macroeconomic environment and relatively slower loan growth.

Vallibel’s funding needs are met primarily through public deposits, which have recorded consistent growth over the past five years, making up 64.96% of the company’s funding base as at end-September 2012. That said, the funding composition tilted towards borrowings in FY Mar 2012 as deposits did not keep pace with robust loan growth. Accordingly, the company’s loan to deposit ratio weakened to a high 149.23% as at end-FY Mar 2012.

Vallibel’s liquidity profile is viewed as above average; while the company’s statutory liquid asset ratio has steadily declined over the last five years given rapid loan growth, it clocked in at 13.83% as at end-FY Mar 2012 (end-FY Mar 2011: 12.75%), improving to 16.55% as at end-September 2012 on the back of a debenture issue. Although the ratio compares better to similar-rated peers’, it is likely to moderate going forward, in view of loan expansion.  Vallibel’s capitalisation levels are deemed average; its tier 1 and overall risk weighted capital adequacy ratios clocked in at 10.59% and 14.29%, respectively as at end-FY Mar 2012 (end-FY Mar 2011: 13.37%). A capital infusion of Rs. 114.40 million upon the company’s listing on the CSE in 2010 and its good internal capital generation have strengthened its capital buffer.